Your CEO May Be Picking Your Pocket

This past April, Forbes released its 2011 list of the United States' highest-compensated CEOs. Its top-ranking members have all ushered in market-beating share price gains during their tenures. But their total annual paychecks seem to have grown much, much faster over the same span of time.

We're shocked! Shocked!
Forbes calculates total paydays based on a CEO's annual salary, bonus, other compensation, and stock gains. That last category calculates how much these executives made by exercising previously granted stock options -- buying bundles of shares for way below their current market price, thus earning an instant paper profit.

Nine of the top 10 bosses on Forbes' 2011 list still helm their companies. Here's what those nine raked in, according to Forbes:




2011 Adjusted Comp. (millions)

2011 Total Comp. (millions)

Stephen Hemsley

UnitedHealth (NYS: UNH)




Robert Iger

Disney (NYS: DIS)




George Paz

Express Scripts (NAS: ESRX)




Lew Frankfort

Coach (NYS: COH)




Ralph Lauren

Polo Ralph Lauren




John C. Martin

Gilead Sciences (NAS: GILD)




James T. Hackett

Anadarko Petroleum




John Chambers

Cisco (NAS: CSCO)




Ivan Seidenberg





Source: Forbes.

The "adjusted compensation" column above subtracts stock gains from those CEOs' annual paydays. As you can see, exercising options made a big difference for many of the folks atop Forbes' list.

To see whether these CEOs actually earned their rich rewards, I tracked their companies' split- and dividend-adjusted share performance from the day they took the helm (or took their company public) until Dec. 1 of this year, and compared it against the S&P 500 for the same period. I also looked at how much their pay had increased over those same periods.

Even without stock gains, most of the folks on Forbes' list saw their pay grow far more dramatically than their companies' shares. And when you factor in options, that gap grew even wider for nearly all of the folks below.

Pay for (a whole lot more than) performance


Starting Date

Stock Gain Since Arrival

Stock Gain vs. S&P (percentage points)

Pay Growth (adjusted)

Pay Growth (overall)

Stephen Hemsley

Nov. 30, 2006





Robert Iger

Oct. 3, 2005





George Paz

April 1, 2005





Lew Frankfort*

Oct. 6, 2000





Ralph Lauren*

June 13, 1997





John C. Martin

April 1, 1996





James T. Hackett

Dec. 1, 2003





John Chambers

Jan. 31, 1995





Ivan Seidenberg*

July 3, 2000





Source: Forbes, Yahoo! Finance, companies' respective 14-A statements.
*These CEOs held their offices before their companies went public. Their starting dates are the days their respective companies IPO'd or began trading in their current form.

UnitedHealth's Stephen Hemsley, the highest-compensated CEO on this year's list, made nearly eight times more this year than the $13.6 million he pulled down in fiscal 2007, his first full year as CEO. Yet over that time, his company's shares rose less than 2%.

Cisco's been more than a 10-bagger on its own, and more than a seven-bagger against the S&P, since John Chambers assumed the CEO spot. But Chambers himself enjoyed more than a 15-bagger on his annual compensation even without options -- and a 95-bagger with them.

Many CEOs get a big chunk of their annual pay from bonuses and other compensation that fluctuate from year to year, so their pay hasn't necessarily marched steadily upward from one year to the next. Still, the gains they've enjoyed this year compared to their starting compensation seem wildly disproportionate to those accrued by their shareholders.

There is a balm in Gilead
Thankfully, at least one member of this list has ensured that both he and his investors enjoyed healthy gains.

Gilead Sciences specializes in drugs that fight HIV and other life-threatening diseases. CEO John C. Martin earned 17-plus times more this year than when he took the job in 1996. But in return, he's helped shareholders score more than a 20-bagger in absolute returns, and against the S&P. That positive prognosis makes his pay increases a much easier pill to swallow.

Why most of these pay gains are just insane
Keep in mind that a stock's current price doesn't reflect what it's done in the past, or what it's doing right now. Investors price stocks according to how they think those companies will perform one, five, even 10 or more years in the future. As of this writing, UnitedHealth shares trade for 10 times the company's most recent earnings, while Cisco trades for 16 times earnings.

So a rising stock price itself doesn't necessarily reflect what a company's actually done -- just what investors think it will do in the future. Many of the CEOs on the list above have seen their pay soar far past even these predictions. In essence, they're getting lavishly paid for things they haven't done yet -- and if they leave their post anytime soon, may never actually do.

The rewards these CEOs are earning for running their companies just don't match the performance they've turned in. Yes, they're setting up strategies that will hopefully help their companies succeed in the future. But they're helping themselves to pay packages that often far exceed those eventual gains, long before anyone knows whether their efforts will actually pay off. Worse yet, their hefty paydays siphon shareholder cash, and the newly minted shares from their exercised stock options dilute other investors.

How to find bosses that give you a bonus
A 2005 Stanford study found that in large companies, higher CEO pay often accompanied lower overall performance. And a 2009 study from professors at Purdue and the University of Utah argued that the more a company pays its CEO, the less its stock will return in the years ahead.

How can you increase your odds of enjoying a fairer share of your stocks' success? Look for companies where CEOs keep their compensation in check, and make more of their money by holding large stakes in the businesses they run. Under Armour's (NYS: UA) founder Kevin Plank owns nearly 24% of the athleticwear company and brought in only $1.3 million in total compensation for 2010, from a base salary of just $26,000. Though the stock's had its ups and downs, since 2005 it's up more than 200% overall, compared to a mostly flat S&P.

Great leaders undoubtedly deserve rewards for improving their companies' performance and growing their shareholders' wealth. But Fools shouldn't suffer any CEOs who help themselves to the lion's share of those gains -- especially at investors' expense.

Want to discover two more companies whose amazing, principled leaders have led them to rule the retail market and enrich their investors? Just click here to read our free special report.

At the time thisarticle was published The Motley Fool owns shares of Coach, UnitedHealth Group, Cisco Systems, and Under Armour. The Fool owns shares of and has created a bull call spread position on Cisco Systems.Motley Fool newsletter serviceshave recommended buying shares of Walt Disney, Under Armour, Gilead Sciences, UnitedHealth Group, Cisco Systems, and Coach, and creating a diagonal call position in UnitedHealth Group. Try any of our Foolish newsletter servicesfree for 30 days.Fool contributorNathan Aldermanwould like to thank the giant spreadsheet that made this article possible. He holds no financial position in any company mentioned above. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool'sdisclosure policyworks for peanuts.

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